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Home Publications Blogs Beat the Press Both Parties Do Not "Acknowledge" That Budget Deficits Will Cause Problems

Both Parties Do Not "Acknowledge" That Budget Deficits Will Cause Problems

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Friday, 15 October 2010 05:03

NPR made this mistake in its top of the hour news segment on Morning Edition. Both parties might say that current budget deficits will cause problems, but they cannot "acknowledge" something that is not true. (If NPR knows this to be true, then it should share this information with its listeners.)

Since the economy has vast amounts of unused resources there is no reason that current deficits would pose any problem. And, the Fed could in principle buy and hold the debt used to finance the deficit so it places no interest burden on future generations.

Comments (11)Add Comment
...
written by izzatzo, October 15, 2010 7:45
Has the witness been sworn in?

Yes, your Honor.

Do you claim that the opportunity cost of employing idle resources is near zero in a deep recession, which also means there really is a free lunch?

Yes and no.

Just answer the question, yes or no. Do you acknowledge the truth of Ricardian Equivalence, Keynesian Socialism, and no free lunch under all circumstances?

OBJECTION your Honor. It's a loaded question. The witness has already acknowledged the truth as facts found in evidence by the Court of Stimulus Appeals.
hidden truth
written by frankenduf, October 15, 2010 8:50
well, a- prefix means not, so it may indeed be true that both parties, in trotting out this propaganda line, have no knowledge about deficit spending causing problems for a demand recession economy
...
written by Fed Up, October 15, 2010 1:08
"Since the economy has vast amounts of unused resources there is no reason that current deficits would pose any problem."

This is totally incorrect. The solution to too much lower and middle class debt owed to the rich is not more gov't debt owned to the rich. You've got the wrong medium of exchange.
...
written by Fed Up, October 15, 2010 1:09
EDIT: "owned" to owed
Absurdities
written by Scott ffolliott, October 15, 2010 2:42
"Those who can make you believe absurdities can make you commit atrocities." François-Marie Arouet -"Voltaire" (1694-1778.)
...
written by diesel, October 15, 2010 7:19
This is a subtle observation about existential import in the word "acknowledge". It reveals how arguments can be won without a shot being fired, in the very act of laying out the implicit question-begging terms. Nicely done.
No Interest Burden?
written by Cujo359, October 16, 2010 2:02
Why is there no interest burden if the Fed buys the debt? This may seem like an obvious thing, but it's lost on me.
News Flash: Political Parties engaged in politics!
written by paul, October 16, 2010 2:11
"Both parties might say that current budget deficits will cause problems, but they cannot "acknowledge" something that is not true."

This being the season of the witch in DC, both Ds & Rs are in high dungeon over the deficit which is just another game they both love to play ad nauseum. Oh for an honest politician who would point out that we need to double the deficit right now. Case in point: when WWII spending finally ended the GD, the deficit as a percent of GDP was nearly triple today's deficit, so merely doubling the deficit would be prudent.
no burden from debt held by the Fed
written by Ed Dolan, October 17, 2010 2:33
"The Fed could in principle buy and hold the debt used to finance the deficit so it places no interest burden on future generations."

An interesting claim. In a way, it's actually true, but at the same time, the statement is completely misleading.

In the short run, when the Fed buys debt (Bernanke said on Friday that they are about to do so) it does remove the interest burden from the public. Cujo359, it can be explained like this:. When the Fed holds a Treasury bond on its balance sheet, the Treasury does continue to pay interest on the bond, and the Fed earns a profit. However, after the Fed deducts its operating expenses, it turns over all its net income to the Treasury, so the transaction as a whole is a wash. This is true not only "in principle" but it is something that really happens. In economic jargon this ability of the central bank to provide financing to the government free of interest burden is sometimes called "seigniorage."

The tricky part of the statement we started with is the "buy and hold" part. When the Fed buys securities, how does it pay for them? It pays through the banking system. The money the Fed uses to pay for the bond is credited to the bond-seller's bank account. (BTW, the Fed does not buy the bonds directly from the Treasury, but from a private bond dealer. For that reason it is called an "open market operation.) The resulting increase in bank reserves counts as part of what economists call the "monetary base," which can be thought of as the raw material out of which the banking system makes new money by making new loans.

What happens when the monetary base grows? For one thing, since a change in the law in October 2008, the Fed pays interest on banks' reserve deposits, so it is not quite true there is no interest cost to the taxpayer. But the interest on reserves is less than the interest on the T-bonds, so I still can give a grade of "partly true" since there is an interest saving to the taxpayer.

What about the "hold" part, though? Right now the Fed can hold those bonds because banks aren't making many new loans, and the expanded monetary base is inactive. It just piles up without affecting the economy much. At some point, tho, the rate of inflation will start to rise. When it hits the Fed's two percent inflation tolerance ceiling, the Fed has to start implementing its "exit strategy" of selling the bonds back to the public. At that point, the interest burden of the debt moves right back onto the shoulders of future generations of taxpayers.

And what happens if the Fed refuses to implement its exit strategy and just holds the bonds indefinitely? In that case, there is an explosion of the money supply as banks suddenly start using those previously-passive reserves to make loans. That causes a further speedup of inflation, and pretty soon it is hyperinflation. This, too, is not just something that can happen "in principle." It has been demonstrated over and over again. Ever hear of Zimbabwe?

But even in the Zimbabwe scenario, it is still true that if the Fed does "buys and holds" Treasury bonds, there is little or no interest burden on future generations. There is just a hyperinflation burden, instead. Take you pick.


Unused resources
written by Scott Dunn, October 17, 2010 6:54
"Since the economy has vast amounts of unused resources there is no reason that current deficits would pose any problem." I find this statement very interesting in that it correlates well with an observation made by this man, David Casey Johnston. He recently made the observation that 85% of the wealth is owned by the top 20% income earners. (see here: http://www.tax.com/taxcom/taxb...enDocument)

I would say that those vast unused resources are held by the top 20% earners. The conservative line is that if we keep taxes low, that top 20% will spend their money. But as we have seen over the last 10 years, they did not. In fact, they did the opposite, they hoarded the money. I've seen several different and reliable sources state that corporate America is sitting on a $2 Trillion pile of cash. This is all consistent with Robert Reich has been saying for years now (to paraphrase): Giving tax breaks to the rich to get them to spend more money doesn't work. They've already spent all the money they wanted to spend.

Since they aren't planning on spending any more money, the only other way to put that money back into the economy is to tax it and spend it.
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Dean Baker is co-director of the Center for Economic and Policy Research in Washington, D.C. He is the author of several books, his latest being The End of Loser Liberalism: Making Markets Progressive. Read more about Dean.

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